Step 2: Exploring Your Options

Pension sharing is available for divorce cases initiated after 1 December 2000, starting from the date the petition is lodged with the court. It does not apply retroactively, nor is it available in cases of legal separation or for cohabiting partners.

Additionally, you cannot request a pension sharing order to take effect at a future date, such as when either party reaches a specific age.

There’s no fixed rule on how pensions should be divided. Pensions are treated like any other asset in the divorce, although they can often be one of the largest or second-largest assets involved.

Pensions can be divided to equalize either the capital value or the retirement income, or they can be allocated to meet specific financial needs. It is also possible to exclude benefits accrued before marriage or after separation, depending on the specific circumstances of the case. However, in situations where financial needs play a role, excluding these benefits has become less common due to recent legal precedents. It’s important to discuss this with your family lawyer.

There may also be adjustments made in consideration of other assets retained, such as the equity in the family home.

Ultimately, there is no definitive method for dividing pensions. If an agreement cannot be reached, the court will make the decision.

A pension sharing order cannot be applied to any pension scheme that already has an attachment order in place, even if it is from a previous marriage.

In some cases, an attachment order can be discharged or replaced with a pension sharing order.

Benefits that can be included in a pension sharing order:

• Final salary schemes, including AVCs
• Occupational money purchase schemes, including AVCs and Section 32 Buyouts
• Personal pension plans
• Stakeholder pensions
• Retirement annuities
• Small Self-Administered Schemes (SSAS)
• Funded Unapproved Retirement Benefit Schemes (FURBS)
• Free-Standing AVCs (FSAVCs)
• Income withdrawal arrangements
• Annuities
• State Earnings-Related Pension Scheme (SERPS)
• Second State Pension (S2P)

In England, Wales, and Northern Ireland, all pension benefits accrued up to the date of divorce can be shared.

Benefits that Cannot Be Shared Include:

• Basic State Pension
• State Graduated Pension
• Equivalent Pension Benefits (when these are the only pension rights in the scheme)
• Spousal or dependent pensions in payment from a prior marriage
• Death-in-service lump sum
• Benefits already subject to an attachment order
• The pensions of holders of the three Great Offices of State: Prime Minister, Lord Chancellor, and Speaker of the House of Commons

Yes, a pension sharing order can be applied to pensions that are already in payment, whether through an annuity or income drawdown.

For annuities, the existing contract will be adjusted, and new separate annuities will be created for each party. Alternatively, the recipient of the pension credit (the ex-spouse) may choose to transfer the credit to a suitable pension arrangement and defer purchasing an annuity.

The regulations do not provide a specific method for valuing pensions already in payment, so different providers or actuaries may use varying approaches. This can be an area where obtaining advice from a pension on divorce expert (PODE) is advisable.

In the case of income drawdown, the drawdown fund is divided between both parties. The viability of continuing with a smaller drawdown fund for the original member will need to be considered. Similarly, the former spouse receiving a share of the fund should seek advice on how best to access their income, which could include either continuing drawdown or purchasing an annuity, depending on their circumstances, fund size, and risk preferences.

If the ex-spouse dies before the pension sharing order is implemented, the trustees or scheme managers are required to notify any relevant parties within 21 days. The notification will include:

• How the trustees/managers plan to discharge their obligations regarding the pension credit
• Whether the trustees/managers intend to recover any charges from the person nominated to receive the pension credit benefits, along with a copy of the schedule of charges
• A list of any further information needed from the relevant parties to discharge the pension credit liability.

The pension credit awarded to the former spouse will be subject to their personal income tax when the benefits are accessed. The tax is applicable on the pension payments they receive.

Yes, it is possible to have multiple pension sharing orders, even in the context of the same marriage. Additionally, a pension arrangement that has already been subject to a pension sharing order from a previous marriage can be the subject of a further order.

A pension sharing order can be amended before the Conditional Order (previously known as Decree Nisi) is made final. Any application to vary must be submitted before this finalisation. If an application to vary is made, the implementation of the pension sharing order will be paused until the matter is resolved.

Furthermore, it is possible to request a pension sharing order when maintenance is varied for divorce petitions filed on or after 1 December 2000.

Pension credits from occupational pension schemes can either be transferred internally or externally, depending on the scheme rules.

Internal Transfer or Shadow Membership

An internal transfer, also referred to as shadow membership, provides the ex-spouse with pension rights within the scheme but separate from the original member. This should not be confused with attachment orders, which retain the pension rights under the original member’s name.

Unfunded public sector schemes, such as the Principal Civil Service Pension Scheme, only offer shadow membership. However, funded occupational schemes may provide shadow membership voluntarily, although the majority do not.

For example, the Local Government Pension Scheme, being a funded scheme, offers both internal and external transfer options.

External transfer

All funded occupational pension schemes are required to allow pension credit rights to be transferred to another pension arrangement. Non-occupational schemes typically only offer external transfer options, so it’s important for the ex-spouse to seek advice on managing these transfers.

What if I don’t know what to do with a pension credit?

If the ex-spouse does not provide instructions on where to transfer the pension credit, the scheme trustees or managers may take action on their behalf. They could either make the ex-spouse a member of the existing scheme or transfer the benefits into a Section 32 Buyout Plan chosen by the trustees or managers.

Implementation Period

Once the pension sharing order and all necessary documentation have been received by the scheme trustees or managers, the order must be implemented within a four-month period. The implementation period begins on the later of the following dates:

• Receipt of the consent or court order
• The effective date of the pension sharing order
• Receipt of the pension sharing annex
• Receipt of the final order
• Receipt of the required information under the Pension on Divorce regulations

The effective date of the pension sharing order is the later of 28 days after the order is issued or the date of the decree absolute, unless the court specifies a different date.

The required documentation includes:

• Decree nisi
• Decree absolute
• Consent or court order
• Pension sharing annex (P1)

Penalties

If scheme trustees or managers fail to implement the pension sharing order within the required timeframe, The Pensions Regulator (TPR) may impose penalties of up to £1,000 for individuals and £10,000 for corporate trustees.

Issue of the order

The pension sharing order is issued by the court, either through a contested case or a consent order by agreement. In England and Wales, the order is sent to the scheme trustees or managers, accompanied by an annex detailing the pension share as a percentage of the member’s cash equivalent transfer value (CETV) which may be up to 100%. A separate annex is required for each pension arrangement.

While the court is responsible for serving the order on the trustees or managers, it may not always occur promptly. Appropriate measures should be taken to ensure the implementation process begins as soon as possible.

Information required by trustees/managers before implementation

For the transferor (original member):

• All names by which the transferor has been known
• Date of birth
• Address
• National Insurance number
• Name of the pension arrangement related to the pension sharing order
• Membership or policy number

For the transferee (ex-spouse):

• All names by which the transferee has been known
• Date of birth
• Address
• National Insurance number

Tax-free ash sum certification

If the pension subject to the sharing order is already in payment, the ex-spouse will not be entitled to take a tax-free cash sum from the pension credit when it becomes payable.

Death benefits before the order is implemented

If the ex-spouse passes away before the pension sharing order is implemented, the scheme trustees or managers may discharge their liability by granting shadow membership to another person, as if that person were the ex-spouse.

It is advisable to consult with the trustees or managers to determine how they plan to discharge this liability and to encourage the ex-spouse to nominate beneficiaries using a nomination form.

Charges

If there are outstanding charges related to the pension sharing order, the scheme trustees or managers may delay implementation until payment is received. The trustees or managers must provide details of the charges within 21 days of becoming aware that the order may be made.

A notice of charges must be issued to both the member and the ex-spouse within 21 days of receiving the pension sharing order. If no other requirements remain outstanding, the implementation period will begin within 21 days after payment of the charges.

Once all required documentation is received, the scheme trustees or managers must issue a Notice of Implementation to both the member and the ex-spouse within 21 days. This notice must confirm that all necessary information has been received and specify:

• The start date of the implementation period
• The expected date by which the pension credit will be processed

Failure to issue this notice could result in TPR imposing penalties of up to £200 for individuals and £1,000 for corporations, which must be paid within 28 days.

Valuation of pension benefits

During the four-month implementation period, the trustees or managers will recalculate the CETV to determine the precise amount to which the pension credit percentage will apply. This process is referred to as the “Valuation Day.”

Reimbursement of charges

If one party covers the charges on behalf of the other, the amount paid can be recovered as a debt.

Requirements for scheme trustees

Pension sharing orders are enforced through “statutory override legislation,” meaning that trustees must comply with the minimum requirements set out in the Welfare Reform & Pensions Act, regardless of the scheme’s rules.

Incorporating requirements into scheme rules

While trustees can choose to be more generous than the statutory minimum, they must incorporate these legal requirements laid out within the Welfare Reform & Pensions Act into their scheme rules when updating them. Opting out of these requirements is not allowed.

Shadow membership considerations

If an occupational pension scheme permits shadow membership, several factors should be considered, including:

The type of benefits offered (final salary or money purchase)

• The retirement age at which benefits become payable
• Whether early retirement is permitted and if penalties apply
• The death benefits available before or after retirement or implementation
• Default options available

Default Option

If the ex-spouse does not provide instructions on where the benefits should be transferred, the scheme trustees or managers may refuse to implement the pension sharing order until they receive the necessary details. However, they must notify the ex-spouse within 21 days of receiving notice that a sharing order may be made.

Alternatively, the trustees or managers may transfer the benefits to a Section 32 Buyout Plan of their choosing.

Administrative Procedures

Trustees must ensure they have the necessary administrative systems in place to manage pension sharing orders and to record pension debits and credits accurately. They may also need discharge forms to complete the transfer of funds.

Additionally, the scheme trustees or managers must comply with HMRC requirements, ensuring that pension credits are only transferred to a suitable, approved pension arrangement. A copy of the receiving scheme’s HMRC approval letter should be provided. If the transfer includes safeguarded rights, a copy of the ASCON letter is also required.

Charges

Trustees and managers may impose charges for implementing a pension sharing order.

Payment of charges

The payment of these charges can be deducted from the pension debit and credit benefits at the time of implementation. Alternatively, trustees may require payment in cash before implementing the order, which could delay the start of the implementation period.

Although the government has not capped the charges for implementing a pension sharing order, the National Association of Pension Funds (NAPF) has issued a recommended schedule of charges for reference.

Offsetting allows one party’s pension benefits to be considered in the overall settlement by adjusting the division of other matrimonial assets, such as the family home, instead of directly splitting the pension. For example, one spouse might retain the pension while the other retains the family home.

There is no one-size-fits-all method for determining the value of pension benefits when offsetting. Various approaches can be used to estimate the required amount, such as:

• Duxbury tables
• Ogden tables
• Cashflow projections
• Purchase Life Annuity
• Galbraith tables

Duxbury calculations aim to estimate the lump sum needed to provide a lifetime income for the non-pension spouse. These calculations are based on assumptions such as investment returns and life expectancy. However, there is a risk that the assumptions may not hold, potentially leading to the exhaustion of the lump sum before the end of the recipient’s life and leaving them without an income.

While primarily used for capitalising periodic maintenance payments, Duxbury calculations can also help estimate the capital required for retirement income. For more complex scenarios, specialised calculations considering asset allocation and risk tolerance may be more appropriate than the basic tables provided in publications like “At a Glance.”

A Purchased Life Annuity is a product that guarantees a lifetime income, similar to a pension annuity but taxed differently. Unlike pension annuities, where the entire income is taxed, a portion of the income from a Purchased Life Annuity is considered a return of capital and is thus tax-free. This makes it a potentially more tax-efficient option compared to a pension annuity.

However, the benefits of tax-free growth within pension funds up to retirement age should be weighed against the advantages of a Purchased Life Annuity, particularly if the period until retirement is six years or more.

For high-net-worth individuals, a chartered financial planner may prepare a detailed income and expenditure analysis to determine the capital lump sum needed to fund the individual’s lifestyle. This type of projection is also helpful in determining maintenance payments based on future financial needs.

In some cases, one party may seek a larger share of liquid assets, such as the equity in the matrimonial home, to stay in the home or purchase a new one. This could lead to a negotiation where the other party retains more pension rights in exchange for giving up claims to other assets.

Both parties may negotiate for either more pension rights or a higher cash settlement depending on their financial priorities and goals.

A non-pension asset worth £1 is often considered more valuable than £1 of pension funds because reinvesting the cash into a pension qualifies for income tax relief at the individual’s marginal tax rate. This means that the recipient of the cash settlement could potentially reinvest it into a pension arrangement, gaining tax relief either immediately or in the future.

Individuals under 75 can contribute up to 100% of their earnings to a pension plan each tax year, with a current cap of £60,000. However, for those with no earnings, the maximum contribution eligible for tax relief is £3,600 gross per year.

Depending on the extent of the pension shortfall and the settlement required, the non-pension spouse may not be able to contribute enough to make this a viable solution.

A “utility discount” refers to the idea that liquid non-pension assets, like cash, are often more flexible and desirable than a future income stream from a pension. As a result, the value of non-pension assets might be reduced when considering them for offsetting purposes. This discount is more relevant when the recipient is still several years away from retirement.

The utility argument is not based on an actuarial formula, and its application depends on individual circumstances. Typically, a diversified portfolio of investments in various tax-efficient wrappers is recommended.

Retaining the family home is often a priority for spouses, especially when children are involved. However, it’s important to consider the long-term impact of not diversifying financial assets. Pensions offer a balanced and well-diversified investment portfolio, whereas residential property represents a single asset class.

While house prices have risen in recent years, pension funds have historically outperformed property investments in the long term. Maintaining a diversified portfolio across multiple asset classes reduces investment risk and enhances financial security.

The main asset classes are as follows:

• Cash
• UK Equities
• Overseas Equities
• Fixed interest / gilts
• Property

We fully understand that the immediate needs of the family are a priority. However, it’s equally important to consider the long-term financial security of the spouse without pension benefits. At some point, this individual will need a reliable income for their retirement. If the matrimonial home is their sole asset, it may ultimately need to be sold to generate the funds required to support them in retirement.